Topic 4: Environmental Management Accounting

TOPIC 4

ENVIRONMENTAL MANAGEMENT
ACCOUNTING

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Topic 4: Environmental Management Accounting

Outline
• Sustainability for businesses
• Sustainability and management accounting
• Environmental management accounting
• Difficulties in recognising and measuring economic,
environmental and social impacts
• Environmental costs
• Improving supply chain management through measuring
environmental and social impacts
• Strategic performance measurement and sustainability
• Environmental outcomes: capital expenditure analysis
• Climate change and management accounting

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Topic 4: Environmental Management Accounting

Sustainability for businesses

• Sustainable development ‘meets the needs of the
present without compromising the ability of future
generations to meet their own needs’ (UN, 1987)
• Focuses on achieving a sustainable economy, a
sustainable environment and sustainable society
• Corporate social responsibility (CSR) involves
organisations taking into account the social and
environmental impact of corporate activity when
making decisions
(cont.)

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Topic 4: Environmental Management Accounting

Sustainability for businesses (cont.)

• Growing awareness of sustainability and reporting
• By 2008 ,37% of top Australian companies produced stand-
alone sustainability reports, up from 23% in 2005, and a
further 8% integrated sustainability reports within their
annual reports
• In 2010, more than 1000 Australian firms submitted
sustainability reports under the Global Reporting Initiative
(GRI), an increase of 60% over 2009
• Reasons for adopting a sustainability approach
• See Exhibit 17.1
• Stakeholders may influence the adoption of
sustainability practices and reporting (cont.)
• See Exhibit 17.2
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Topic 4: Environmental Management Accounting

Sustainability for businesses (cont.)

Source: KPMG International (2008, p. 23)

(cont.)

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Topic 4: Environmental Management Accounting

Sustainability for businesses (cont.)

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Topic 4: Environmental Management Accounting

Sustainability and management accounting

• Sustainability accounting – information
management and accounting methods that
support a corporation in its movement towards
sustainability
• Identifying, collecting, analysing and reporting
information about the economic, environmental
and social aspects of an organisation’s activities
• Goes beyond the boundaries of financial
accounting and management accounting

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Topic 4: Environmental Management Accounting

What is Environmental Management Accounting (EMA)

• the provision of environmental performance-

related information to stakeholders both within
and outside the organisation
• is a subset of environmental accounting
• provides information about environmental costs
& performance for decision making within the
organisation

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Topic 4: Environmental Management Accounting

Environmental management accounting (EMA)

• Consists of environmentally-related management

accounting systems and practices
• Examples :
• Life cycle costing – identify costs of recycling wastes &
product disposal
• environmental cost accounting,
• environmental performance measures,
• assessment of environmental benefits,
• strategic planning for environmental management
• EMA techniques
• Financially-oriented EMA
• Physically-oriented EMA
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Topic 4: Environmental Management Accounting

Financially-oriented EMA
• Environmental costs
• Costs incurred to prevent, monitor and report
environmental impacts and the costs of non-compliance
with environmental regulations
• Cost of waste management systems, environmental
training, legal activities and fines, record keeping and
reporting, cost of remediation of environmental impacts
• Environmental product costing
• Involves tracing direct and indirect environmental costs
to products
• The cost of waste management, permits and fees,
(cont.)
recycling
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Topic 4: Environmental Management Accounting

Financially-oriented EMA (cont.)

• Environmental performance indicators
• Used to set targets, and monitor environmental
performance, using both financial and physical measures
• Environmentally-induced capital expenditure
• Driven by the desire to improve the organisation’s
environmental impact, or to comply with environmental
regulations
• Environmentally-induced revenues
• Arise from positive environmental actions
• Increased revenue/benefits from the sale of recycled
materials, from higher selling prices for greener products,
increased customer satisfaction, improved employee morale

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Topic 4: Environmental Management Accounting

Physically-oriented EMA
• Techniques that focus on supplying information to
management that accounts for the organisation’s
impact on the natural environment
• Kilograms of noxious waste emissions, kilowatt hours of
electricity used, decibels of noise
• Used for tactical decisions and capital expenditure
decisions

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Topic 4: Environmental Management Accounting

Environmental management systems (EMS) and EMA

• EMS – systems that organisations put in place to

manage their environmental performance
• May include recycling systems, systems to monitor and
control levels of liquids, material and atmospheric
discharge and waste
• ISO 14001 is an international standard for EMA
and its audit
• EMS and adoption of ISO 14001 requires that
environmental performance be measured against
policies, objectives and targets

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Topic 4: Environmental Management Accounting

The benefits of recognising environmental and social impacts

• Attracting & retaining highly skilled employees

who wish to work for an environmentally-
responsible organisation
• Enhancement of the organisation’s reputation as
a responsible and caring organisation
• Identification of potential cost savings
• Reduction of risk of current and future activities
• More effective management of resources
• Improvements in competitiveness
• Greater attractiveness to customers
• Positive reputation
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Topic 4: Environmental Management Accounting

Difficulties in recognising and measuring economic, environmental and

social impacts

• Economic and social impacts are difficult to identify and

measure(often hidden or forgotten), even though they
may be substantial
• Future ecological and social impacts are not yet known
• Current work practices may have future environmental and
social consequences which we cannot predict
• Many costs and benefits are external to the organisation
• difficult to detect and assess
• Many costs and benefits are difficult to measure in
financial terms
• They relate to the future, and the size of the impact may be
unknown

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Topic 4: Environmental Management Accounting

Environmental and SOCIAL COSTS: measured or forgotten

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Topic 4: Environmental Management Accounting

Defining Environmental costs

• The costs that an organisation incurs to prevent,
monitor and report environmental impacts
• May extend into the future
• US EPA defines five tiers of environmental costs
• See Exhibit 17.4
• Private costs (tiers 1 to 4) and societal costs

(cont.)

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Topic 4: Environmental Management Accounting

Environmental costs (cont.)

(cont.)

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Topic 4: Environmental Management Accounting

Environmental costs (cont.)

• Environmental costs can be analysed using the
same framework as used to analyse quality costs
• Prevention activities
• Solve environmental problems before they occur, or turn
problems into opportunities
• Costs of these activities are ‘investments’, as they
reduce the future outlays and provide long-term benefits
• Appraisal activities
• Monitor the levels of environmental impact
• Measure damage, inspect processes and products,
audit supplier performance (cont.)

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Topic 4: Environmental Management Accounting

Environmental costs (cont.)

• Internal failure activities
• To correct breakdowns discovered in appraisal activities
• Cost of cleaning the plant after spillage, cost of
occupational health and safety claims by employees
• External failure activities
• Occur when resolution and remediation efforts fall
outside of the organisation’s management
• Cost of cleaning up polluted sites, fines for
environmental damage, lost profits associated with
damage to reputation
(cont.)

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Topic 4: Environmental Management Accounting

Environmental costs (cont.)

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Topic 4: Environmental Management Accounting

Improving supply chain management through measuring environmental

and social impacts

• Suppliers
• An organisation may be willing to pay more where
suppliers have reduced their environmental and social
impact
• Organisations may work with suppliers to adopt more
responsible environmental and societal practices; this
can lead to cost reductions
• Formal supplier evaluation can include an assessment
of a range of environmental and social factors, as well
as financial factors

(cont.)

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Topic 4: Environmental Management Accounting

Improving supply chain management through measuring environmental

and social impacts

• Customers
• An organisation can work with customers to reduce the
adverse environmental and social impact of products
• Recycling and disposal programs
• Substitution of materials
• Cost savings
• Sometimes customers may be willing to pay more for a
more environmentally-friendly product
• Marketing and strategic considerations need to be
considered in such pricing decisions

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Topic 4: Environmental Management Accounting

Sustainability and performance measurement

• Sustainability reporting – formal reporting of

information about corporate sustainability that
describes the economic, environmental and social
impact of the organisation’s activities
• Also called triple bottom line reporting, social reports,
social audits, environmental reports
• Inside-out approach – measures developed within
the business, reflecting its core values, and fed
through to sustainability reports
• Outside-in approach – measures of sustainability
performance driven by external regulations or
guidelines, which drive organisational activities
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Topic 4: Environmental Management Accounting

Sustainability and performance measurement (cont.)

Source: Based on Australian SAM Sustainability Index (AuSSI) (2009) (cont.)

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Topic 4: Environmental Management Accounting

Sustainability and performance measurement (cont.)

• Global Reporting Initiative (GRI) Guidelines are

regarded as the global standard for sustainability
reporting
• 48 sets of core indicators + 31 additional indicators
• Includes unique indicators for certain industries
• Dow Jones sustainability index (DJSI) compares
the sustainability performance of the world’s
largest companies
• Australian SAM Sustainability Index (AuSSI)
assesses the sustainability performance of
(cont.)
Australian companies
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Topic 4: Environmental Management Accounting

Sustainability and performance measurement (cont.)

• ISO 14031 environmental performance indicators

• Operational performance indicators: measures of waste
levels and energy consumption relative to sales or some
other activity
• Management performance indicators: measure the
efforts of management to improve the environmental
performance of their organisation
• Environmental condition indicators: measure the actual
condition of the environment at a local, national or
global level
• May be reported as absolute measures or as a
percentage relative to a baseline

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Topic 4: Environmental Management Accounting

Strategic performance measurement systems (SPMS) and sustainability

• Adding sustainability to the balanced scorecard

• Sustainability measures may be included within the four
perspectives
• An environmental or social perspective may be added to
the BSC
• A separate sustainable scorecard may be developed
• Strategy maps may be developed to identify
cause and effect relationships between
objectives, strategies and to guide the selection
of performance measures
(cont.)

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Topic 4: Environmental Management Accounting

Strategic performance measurement systems (SPMS) and sustainability

(cont.)

Source: Adapted from Epstein (2008, p. 138)

(cont.)

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Topic 4: Environmental Management Accounting

Strategic performance measurement systems (SPMS) and sustainability

(cont.)

Source: Adapted from Figge et al.

(2002, p. 282)

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Topic 4: Environmental Management Accounting

Environmental outcomes: capital expenditure analysis

• Inclusion of environmental costs and benefits

may make financially non-viable projects more
attractive or financially viable projects less
attractive
• Weighting given to environmental factors
depends on the organisation’s values and
preferences
• Some capital expenditure analysis may be driven
by the need to be environmentally responsible
(cont.)

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Topic 4: Environmental Management Accounting

Environmental outcomes: capital expenditure analysis (cont.)

Source: Tellus Institute (2000), cited by the United Nations (2001)

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Topic 4: Environmental Management Accounting

Climate change and management accounting

• Climate change is the increase in temperature

and changes in other climate characteristics,
which has been observed since the mid-1980s
• Partially caused by the build up of gases
(particularly carbon dioxide) which are trapped in
the Earth’s atmosphere (the ‘greenhouse effect’)
• Actions to reduce greenhouse gas emissions are
called ‘mitigation’, and actions to respond to
climate change are called ‘adaptation’
(cont.)

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Topic 4: Environmental Management Accounting

Climate change and management accounting (cont.)

• An emissions trading scheme (ETS) is designed

to encourage organisations to reduce emissions,
based on the demand and supply of emissions
permits
• In November 2011, the Australian parliament
passed the Clean Energy Bill which involves the
introduction of a fixed price carbon tax from 2012,
which will eventually lead to a floating price ETS

(cont.)

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Topic 4: Environmental Management Accounting

Climate change and management accounting (cont.)

• Implications of climate change for business

• With the introduction of the carbon tax, climate change and
sustainability is likely to be on the strategic/operational
agendas of many companies
• Reducing emission may save costs, is an important risk
management issue and may provide new business
opportunities
• However, organisations that respond to the need to manage
carbon emissions may not commit to a broader sustainability
agenda
• Implications for management accounting
• The five-tier cost framework of the US EPA may provide a
(cont.)
useful way to identify, classify and measure costs associated
with climate change
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Topic 4: Environmental Management Accounting

Climate change and management accounting (cont.)

• Organisations that pay a carbon tax or participate in

an ETS and wish to promote themselves as carbon
neutral need to measure greenhouse gas emissions
• Need to understand their ‘carbon footprint’, and the
quantity of greenhouse gas emissions they produce
• International protocol (WRI/WBCSD) outlines three
levels of measurement
• Scope 1 – direct emissions controlled by the business
• Scope 2 – indirect emissions from purchased electricity
consumed by the business
• Scope 3 – other indirect emissions caused by business
activities, from sources outside of the business

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Topic 4: Environmental Management Accounting

Climate change and management accounting (cont.)

• Management accountants can play a role by

• Collecting and analysing non-financial information
• Gathering information from across the value chain
• Managing information systems and large data bases
• For example
• Estimate the cost of emissions produced by products,
department and customers
• Identify carbon non-value-added activities
• Understand carbon drivers
• Supplier evaluations may include supplier emissions
• Quantity of emissions produced and causes of
emissions may be measured
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Topic 4: Environmental Management Accounting

Summary
• Sustainability involves considering the economic,
environmental and social impacts of an
organisation’s activities
• Environmental management accounting (EMA)
consists of environmental-related management
accounting systems and practices
• Environmental and social impacts can be difficult
to recognise and to measure
• Environmental costs can be classified and
managed using a five-tier framework

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Topic 4: Environmental Management Accounting

Summary (cont.)
• Environmental and social costs can be input into
management decision making, including capital
expenditure analysis
• Performance measurement systems, including
SPMS, can be adapted to include environmental
and social measures
• External frameworks include ISO 14000 series and the
GRI guidelines
• Management accountants are well equipped to
produce a range of information that will help
businesses respond to climate change
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